Residential starts won't meet demand

Residential building activity will vary widely across the nation in the next few years, but supply still won't meet underlying demand.

According to BIS Shrapnel, excessive rate rises could prompt another downturn in residential building starts across Australia by 2013.

“Despite weakening net overseas migration inflows, which have fallen from a record 300,000 persons in 2008/09, to an estimated 165,000 in 2010/11, construction nationally still remains below the level of underlying demand, although in some states the market is closer to balance,” said BIS Shrapnel managing director, Robert Mellor.

In the shorter-term, NSW should see a sharp rise in residential building activity, the report said.

“In NSW total building commencements are forecast to grow 15 per cent in 2011/12 and 14 per cent in 2011/13,” the company said in its Building in Australia 2011 report. “Growth in residential construction is anticipated to be very strong over these years, with new dwelling commencements coming off a very low base.”

The Northern Territory is also expected to see a sharp rise in residential construction. “Residential building is forecast to show an increase over both years underpinned by rising pressure in the Darwin property market,” the company said.

BIS Shrapnel said Queensland should see modest growth in 2011/12, although this is expected to result in a substantial deficiency that will underpin a sharp rise in residential construction in 2012/13, with both detached house and higher density projects contributing.

In Victoria, the company said residential dwelling starts would fall from their record levels of the last financial year, “with pent-up demand pressures easing and rising interest rates impacting on affordability after substantial price growth over the last two years.”

South Australia is expected to record a small fall in new residential construction, “with a modest excess dwelling supply translating to an easing in new dwelling construction.”

In Western Australia, residential construction is expected to pick up by 2012/13, while in the ACT residential building is likely to decline after strong activity in 2010/11.

The longer-term outlook for residential building wasn’t good, with an expected uptick in residential building activity in 2012-13 to be shortlived, the company said.

“As investment in the resource sector ramps up, emerging skills shortages will drive wage cost inflation, which will prompt the Reserve Bank to take more aggressive action on interest rates through 2013,” the company said.

“BIS Shrapnel forecasts the variable rate to peak at 9.4 per cent in the second half of [2013], which will impact on affordability and induce a downturn in residential construction before the upturn has a chance to play out.”

Mr Mellor said the downturn in residential construction will result in a substantial underlying deficiency of dwellings emerging across most states, while prices in most states are also expected to have declined in real terms and affordability will have improved.